City hopes fade in the fog of war

LONDON shares suffered a second consecutive day of losses as hopes of a swift victory in the Iraqi war continued to evaporate in the City. Dealers said growing concern about the length of the conflict and the rising death toll among allied troops had spooked nervy investors, leaving last week's war rally a distant memory.

A former commander from the 1991 Gulf War said coalition forces could suffer as many as 3,000 casualties. And reports that Iraq had authorised its troops to use chemical weapons saw the dollar continue to tumble on foreign exchanges, falling a third of a cent against sterling to $1.5760.

The FTSE 100 index of leading shares had fallen 14.5 points to 3728.8 by early afternoon after diving more than 3% on Monday. At one stage, it was off 83 points.

'The war has not been the walk in the park we were led to expect,' said Gary Parkinson at City bookie Financial Spreads. 'It's not going to be as clean as we'd hoped and people are worried about retaliation in other areas of the world.'

Freddie Tulloch of IG Index said: 'The fact is people were convinced this would be a perfect war and we would be in Baghdad within days. Now people are talking about guerrilla warfare and unless we get some good news the Footsie could slide 300 to 400 points.'

Asian markets were also sent reeling, Tokyo's Nikkei 225 closing down 2.3%, despite further intervention from the Bank of Japan. Overnight in the US, the blue-chip Dow Jones Industrial Average suffered its heaviest loss - 3.6% - since last September. Futures markets pointed to a 40-points drop in the Dow at today's opening bell.

US consumer confidence figures this afternoon will be key. The heightened nerves sparked a revival in the oil price as investors once again fretted about the security of Iraq's vast and lucrative oil reserves. North Sea Brent climbed another 66 cents to $26.75 a barrel after yesterday jumping $1.74. Oil prices had hit four-month lows last week on hopes of rapid and successful military action in the Gulf.

Bank of England Governor Sir Edward George last night sought to soothe investor jitters, saying the British and world economies would recover gradually, despite war uncertainties.

But some economists said the Bank would be forced to cut interest rates again in coming months. Ciaran Barr at Deutsche Bank predicted the cost of borrowing would fall from 3.75% to 3% over the next 12 months.

Meanwhile, President George Bush went to Congress to request $75bn (£48bn) in emergency funding to pay for the conflict. Treasury Secretary John Snow described the planned budget deficits as 'regrettable'.